How Banks Can Set Effective Climate Targets to Align with Net-Zero Goals

Banks play a pivotal role in the global transition to a net-zero economy. As financial intermediaries, they can influence businesses climate actions through lending, investments, and advisory services. However, to truly drive decarbonization, banks must set clear, science-based climate targets that align with the Paris Agreement.

The United Nations Environment Programme Finance Initiative (UNEP FI) has developed the Guidelines for Climate Target Setting for Banks, which provide a structured approach for financial institutions to align their operations with net-zero objectives. These guidelines emphasize ambitious, transparent, and measurable climate commitments.

Key Principles for Climate Target Setting

The UNEP FI guidelines outline essential principles that banks must follow to ensure their climate targets are credible and impactful:

1. Ambition Aligned with the Paris Agreement

• Banks’ targets must align with keeping global temperature rise below 2°C, with efforts toward 1.5°C.

• Commitments should support the transition toward a net-zero economy by 2050.

2. Comprehensive Scope

• Climate targets must cover banks lending and investment activities (Scope 3, Category 15 emissions).

• Banks should include Scope 1, Scope 2, and significant Scope 3 emissions from their clients.

3. Long-Term and Interim Targets

• Banks must set a 2050 net-zero target.

• They must also establish interim targets for 2030 or earlier.

• Every five years, new interim targets should be set.

4. Governance and Accountability

• Climate targets must be approved at the highest executive level.

• Banks must publicly disclose targets and report annually on progress.

• Independent third-party verification is encouraged.

5. Real Economy Impact

• Banks should prioritize high-emitting sectors (e.g., energy, transport, construction) and align targets with widely accepted decarbonization pathways.

• They must measure actual emissions reductions, not just shift portfolios away from polluting industries.

Guidelines for Setting and Implementing Climate Targets

The UNEP FI guidelines define a four-step process to ensure banks set credible and science-based climate targets:

Step 1: Establishing a Climate Baseline

• Banks must measure and disclose their financed emissions profile.

• They should track absolute emissions (total CO₂ output) and emissions intensity (CO₂ per unit of investment).

Step 2: Using Science-Based Decarbonization Pathways

• Banks should align with Intergovernmental Panel on Climate Change (IPCC) scenarios and International Energy Agency (IEA) Net-Zero Roadmaps.

• Targets should be sector-specific, reflecting each industry’s decarbonization trajectory.

Step 3: Regular Target Review and Adjustments

• Banks must review and revise targets at least every five years to reflect the latest climate science.

• If significant portfolio changes occur, banks should adjust their targets accordingly.

Step 4: Embedding Climate Targets into Operations

• Climate targets should integrate with risk management, credit policies, and client engagement strategies.

• Banks should develop sector-specific lending policies for industries like fossil fuels, real estate, and transportation.

Challenges in Climate Target Setting

While UNEP FI provides a clear framework, banks face several challenges in setting and achieving climate targets:

1. Data Availability and Accuracy – Many companies do not disclose full emissions data, making Scope 3 estimates difficult.

2. Balancing Transition Finance – Banks must support high-emission clients in their decarbonization journey rather than divesting prematurely.

3. Regulatory Uncertainty – Climate policies vary by country, affecting financial institutions ability to standardize targets.

4. Investor and Stakeholder Pressure – Banks must balance financial performance with sustainability commitments.